Differences between a permanent establishment, a branch, and a subsidiary in Spain

When a foreign company wishes to establish a presence in Spain to carry out commercial activities, it has three main options:

1. Permanent establishment
2. Branch
3. Subsidiary

While all three structures allow for similar business activities in practical terms, there are important legal distinctions between them.

What is a permanent establishment?

A permanent establishment is the simplest way for a foreign company to operate in Spain without incorporating a new legal entity. This model is primarily governed by tax regulations rather than commercial law.

If the foreign company is duly incorporated in a Member State of the European Union (EU), it may operate in Spain without requiring additional authorisations, other than those imposed by local administrative regulations applicable to the specific activity. For instance, if the company holds the necessary permits for a particular industrial activity in its home country, it may carry out that same activity in Spain. However, if the Spanish premises are subject to specific administrative requirements –such as the submission of a technical report– these must also be fulfilled locally. In other words, the absence of legal barriers relates to the recognition of the foreign company and its entitlement to pursue its corporate purpose, but does not exempt it from complying with external requirements such as technical specifications, product labelling, or workplace health and safety standards.

The concept of a permanent establishment exists primarily to ensure that profits generated from business activities within a given territory are taxed in that territory. Otherwise, such profits would only be taxed solely in the jurisdiction where the foreign company is domiciled.

A permanent establishment does not constitute a separate legal personality; the foreign company retains its legal status and operates directly in Spain. Consequently, any liability arising from its operations in Spain is borne directly by the parent company.

As it lacks legal personality and is not governed by corporate law, its formal presence in Spain is limited to dealings with the Tax Authorities (requiring a Spanish Tax Identification Number, or NIF), the Social Security system (notification of the workplace), and contractual relationships with third parties (employees, landlords, suppliers, customers, etc.). It does not require a public deed, registration with the Mercantile Registry, or the filing of annual accounts.

Another particularity is that it does not have its own administrative body. Management remains with the governing body of the foreign entity. That said, attorneys-in-fact (apoderados) may be appointed with powers granted from the company’s home jurisdiction.

A permanent establishment may only carry out activities already included within the corporate purpose of the foreign parent company and may not engage in unrelated or unauthorised business activities.

Advantages and disadvantages of a permanent establishment

Advantages:

• No need to incorporate a new company in Spain.
• Legal liability remains with the foreign entity.
• No requirement to register with the Mercantile Registry or file annual accounts.

Disadvantages:

• No separate legal personality.
• May only carry out activities expressly included in the corporate objects of the foreign company.

What is a branch?

A branch is a legal form of operating in Spain that lies between a permanent establishment and a subsidiary. Like a permanent establishment, it does not have a separate legal personality from the parent company, but it is subject to specific commercial regulations. It must be established by notarial deed, registered with the Mercantile Registry, and is required to prepare and file annual accounts.

Despite its formal recognition under Spanish law, legal liability remains entirely with the foreign parent company. The branch is also limited to the activities set out in the corporate objects of the foreign entity.

A key distinction is the requirement to appoint a branch director (gerente), who acts as the administrative body and must be registered with the Mercantile Registry. This individual must be granted full authority to represent the branch in Spain.

Taxation is handled in the same way as for a permanent establishment, and a Spanish Tax Identification Number (NIF) is also required.

Given the limited differences, the main factor in choosing between a branch and a permanent establishment is whether the company wishes to appoint representative in Spain with full powers.

The obligation to file annual accounts is rarely decisive, as both structures are subject to taxation and must maintain accounting records.

Requirements for incorporating a branch in Spain:

• Notarial deed of incorporation.
• Registration with the Mercantile Registry.
• Filing of annual accounts.

Key differences from a permanent establishment:

• A branch must have a registered director with full powers of representation.
• It is subject to more formal administrative requirements, though taxation is similar.

What is a subsidiary?

Unlike a permanent establishment or a branch, a subsidiary is a newly incorporated company in Spain, legally distinct from the foreign parent. It has its own legal personality, and all liability rests solely with the subsidiary.

Incorporating requires a notarial deed and registration with the Mercantile Registry. The subsidiary must comply with all formalities applicable to Spanish companies, including obtaining a Spanish Tax Identification Number (NIF), filing annual accounts, and fulfilling corporate obligations.

As a separate entity, the subsidiary assumes full responsibility for its business activities. The parent company is only liable up to the amount of capital contributed.

A subsidiary may adopt a corporate purpose different from that of the parent company, allowing for diversification.

It is taxed independently in Spain, which may offer advantages depending on the group’s international tax strategy.

Advantages of incorporating a subsidiary:

• Liability is limited to the subsidiary.
• Freedom to adopt a different corporate purpose.
• Full legal and tax autonomy.

Requirements:

• Notarial deed and registration with the Mercantile Registry.
• Filing of annual accounts and compliance with Spanish corporate obligations.

Conclusion

Each structure –permanent establishment, branch, and subsidiary– offers different advantages depending on the foreign company’s objectives. The choice depends on the desired level of autonomy, scope of activities, and liability structure. A permanent establishment is the simplest option, a branch offers a formal presence with a local representative, and a subsidiary provides full independence and legal separation.

If you require legal advice on establishing your business in Spain, do not hesitate to contact AGM Abogados. We will be pleased to assist you.